I prepare quite a few returns with the Foreign Earned Income Exclusion. The Exclusion allows bona fide residents of a foreign country or individuals who are outside of the United States for 330 days out of a 365-consecutive day period to exclude about $99,000 from income tax. Of course, you do have to be outside of the US (or otherwise qualify) to take the Exclusion. That minor distinction was allegedly forgotten by a Las Vegas tax preparer.
Harvey Cage owns CSN Tax Services. He faces a lawsuit from the US Department of Justice alleging that he not be allowed to prepare returns containing the Foreign Earned Income Exclusion. The DOJ alleges in the lawsuit that Mr. Cage ignored the qualifications required to claim the Exclusion, and that he claimed it for lots of his clients who weren’t entitled to it. The tax loss to the US is estimated at $3.7 million. That’s a lot of clients taking the Exclusion.
What Mr. Cage allegedly did is noted in the complaint:
On behalf of these clients, Mr. Cage filed forms 2555 claiming a foreign earned income exclusion for which his clients were not entitled. Mr. Cage typically wrote on the top of form 2555 “CLAIMING WAIVER” and attaching a statement entitled “REQUEST FOR CONSIDERATION OF 330 DAY WAIVER.” These requests for waiver of the 330 day period were made irrespective of the Internal Revenue Code, associated Treasury Regulations, relevant Revenue Procedures listing of eligible countries, and IRS published guidance on the issue.
The waiver being referred to is noted in the DOJ Press Release:
This period can be waived when the Secretary of the Treasury determines, after consultation with the Secretary of State, that individuals were required to leave a foreign country due to war, civil unrest or other conditions that preclude the normal conduct of business, among other things. In implementing this waiver provision, each year the Secretary of the Treasury publishes a list of countries that have been determined eligible for waiver requests. According to the suit, Cage ignored the published list of waiver-eligible countries in filing for his customers’ exclusion of foreign earned income.
I’ve yet to file based a return with the Exclusion based on the waiver list. The DOJ allegations make it seem like Mr. Cage shouldn’t have filed any based on the waiver, too.